HUD secretary suggests openness to changing FHA ‘life of loan’ requirement

Key Takeaways:

– HUD Secretary Marcia Fudge suggested the possibility of eliminating life-of-loan premium requirements for FHA-backed mortgages.
– Reps. Brad Sherman and Gregory Meeks raised the issue during a congressional hearing, emphasizing the impact on working people, people of color, and first-time homebuyers.
– Fudge expressed willingness to consider eliminating the payments when borrowers reach a certain loan-to-value ratio or gain equity in their homes.
– Multiple housing advocacy organizations, including the MBA and NHC, have highlighted the life-of-loan requirement as a key affordability issue.
– They argue that the requirement makes FHA loans less favorable compared to conventional loans, where mortgage insurance can be dropped once a certain equity threshold is reached.
– NHC CEO David Dworkin believes addressing the life-of-loan requirement should be prioritized before considering any cuts to mortgage insurance premiums.

HousingWire:

Secretary of the U.S. Department of Housing and Urban Development (HUD) Marcia Fudge suggested to a congressional committee that the department could consider eliminating life-of-loan premium requirements for mortgages backed by the Federal Housing Administration (FHA), but did not offer any indication about the issue’s priority level at HUD.

Sitting for a HUD oversight hearing conducted by the U.S. House of Representatives Financial Services Committee on Jan. 11, Rep. Brad Sherman (D-Calif.) first brought the issue up by saying it is an important element to address for the kinds of people who most commonly make use of FHA mortgage programs.

“I don’t have to tell you, that’s working people, people of color [and] first-time homebuyers,” Sherman said. “They have to pay the mortgage insurance premiums, [which] raises their costs. Are you willing to look at not requiring them to make these payments through the life of the loan, but rather to eliminate the payments when they get a certain loan to value as the value of the house goes up?”

“Yes, I’m willing to look at it,” Fudge responded.

Nearly an hour after that exchange, Rep. Gregory Meeks (D-N.Y.) brought the topic up again.

“My question would be do you think there could be a scenario where FHA mortgage insurance premiums could follow a model that is similar to the private mortgage insurance [market] where, after a period of time you get equity in the home [that then] drops the monthly cost? Is that something you think we could work on, and that HUD could do?”

“I would love to see it happen,” Fudge responded.

When interviewed in December, leaders at multiple housing advocacy organizations including the Mortgage Bankers Association (MBA) and the National Housing Conference (NHC) cited the life of loan requirement as a key affordability issue in 2024.

“We think that FHA should consider further changes to the mortgage insurance premium, perhaps including the elimination of the life of loan premium requirement,” said Bob Broeksmit president and CEO of MBA to HousingWire in December. “On an FHA loan, you keep paying the mortgage insurance premium until you pay the loan off whereas in a conventional loan, once your equity reaches a certain point, you can get the mortgage insurance dropped.”

When asked about an MIP cut, NHC President and CEO David Dworkin said the “bigger issue” is the life of loan requirement, and that the MIP is currently “at a reasonable level.”

“[Life of loan] makes FHA a much more negative execution for the consumer,” Dworkin said last month. “Let’s say I have more than 20 or 25% equity in my house. I shouldn’t be paying mortgage insurance to FHA; I would not have to be doing it if I had a loan that was bought by Fannie Mae or Freddie Mac. And so I think that I’d like to see that addressed before we talk about another MIP cut.”

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Property Chomp’s Take:

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During a recent HUD oversight hearing conducted by the U.S. House of Representatives Financial Services Committee, Secretary Marcia Fudge suggested that the U.S. Department of Housing and Urban Development could consider eliminating life-of-loan premium requirements for mortgages backed by the Federal Housing Administration (FHA). This proposal was raised by Rep. Brad Sherman, who emphasized the importance of addressing this issue for working people, people of color, and first-time homebuyers who commonly make use of FHA mortgage programs.

The life-of-loan premium requirement refers to the mortgage insurance premiums that borrowers have to pay throughout the entire duration of their loan. This requirement raises the overall costs for borrowers and can have an impact on their ability to afford homeownership. Rep. Sherman proposed the idea of eliminating these payments when borrowers reach a certain loan-to-value ratio as the value of their house increases.

Secretary Fudge responded positively to Rep. Sherman’s proposal, stating that she is willing to look into it. Rep. Gregory Meeks also expressed support for the idea, suggesting that FHA mortgage insurance premiums could follow a model similar to private mortgage insurance. Under this model, monthly costs would decrease as borrowers gain equity in their homes over time.

Leaders of housing advocacy organizations, including the Mortgage Bankers Association and the National Housing Conference, have also highlighted the life-of-loan requirement as a key affordability issue. They believe that FHA should consider further changes to the mortgage insurance premium, potentially including the elimination of the life-of-loan premium requirement. In conventional loans, borrowers can have the mortgage insurance dropped once their equity reaches a certain point.

While there have been discussions about a potential Mortgage Insurance Premium (MIP) cut, housing advocates argue that the focus should be on addressing the life-of-loan requirement. They believe that this requirement makes FHA a less favorable option for consumers compared to loans bought by Fannie Mae or Freddie Mac, where borrowers can stop paying mortgage insurance once they have sufficient equity in their homes.

In conclusion, the topic of eliminating life-of-loan premium requirements for FHA-backed mortgages has gained attention and support from various stakeholders. While Secretary Fudge and housing advocacy organizations are open to exploring this possibility, it remains to be seen whether it will become a priority for HUD. Nonetheless, this proposal has the potential to make homeownership more affordable and accessible for working people, people of color, and first-time homebuyers who rely on FHA mortgage programs.

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